Turkey Shooting (TUR): Opportunities and Pitfalls...

Turkey faces both opportunities and pitfalls in the new economic reality:

In our Weekend Edge, we initiated a case to be made for Turkey to emerge as a strong developing European economy (on a relative basis).

• External debt as % of GDP has declined to just over 37% since the 2001 crisis. • Oil prices, a primary driver of the trade deficit, have declined dramatically (Turkey currently produces less than 9% of its daily oil consumption). • The banking system there has shown relative resilience in the face of the credit crisis so far. Regulation is something they have already proactively managed.• Skilled labor in Turkey is inexpensive and the labor force is both young and educated. This makes the country well situated geographically to capitalize on trade opportunities with more than just the EU (currently more than 50% of the market for Turkish exports).• Although consumer inflation remains in low double digit territory, this represents a major decline from the nosebleed levels seen from 2001 to 2003, suggesting that domestic consumption may maintain its current levels in the near term.

There are clearly a number of major issues which face Turkey that could derail the bullish case: bureaucratic and regulatory hurdles which stymie foreign investment; significant security issues on its borders with Iraq, Iran, and Georgia; and a current account deficit that remains troublingly high.

With a stock market battered by the global selloff, Turkey is beginning to look attractive on both a quantitative and a relative value basis to other emerging markets. We will be keeping our eyes on Turkey, looking for data to indicate whether or not Turkish political and corporate leaders are making the right decisions to capture opportunities and avoid pitfalls in the new reality.

Andrew BarberDirector

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11/03/08 01:29 PM EST

Coffee Update: Seasonality Remains Bullish...

We have been following Coffee closely in recent weeks as interesting supply data emerged from South America and South East Asia. The latest bullish data point to emerge is unseasonable rain in the central highlands of Vietnam which may delay and diminish yields for the current Robusta cycle there. In earlier posts we discussed Vietnam’s recent emergence as a major global producer of Coffee, particularly the less valued Robusta variety. With heavy rainfall in the Dak Lak, Dak Nong and Lam Dong regions and more anticipated by meteorologists, contracts for both Arabica and Robusta contracts spiked sharply late in the week.

The short term bullish thesis that we have been exploring for coffee in General and Arabica is based on the assumption that consumers in China and other developing economies that have acquired a taste for premium blends, will continue to be loyal consumers for the immediate future despite signs of slowing economic growth. In short, demand resilience combined with tightening supply in both the primary and substitute markets will drive the price higher in the near term.

The seasonal inflections of the futures markets also support the bullish case here. We averaged returns for Arabica contracts from 1973 to the present. On a 35,30,20,15, 10 and 5 year average basis the near month contract has risen in November as part of a seasonal pattern that straddles the end of harvest in Brazil and the return of cold weather in the US and Europe –which traditionally increases the consumption of hot beverages (see chart below).

The long term bullish case is less clear. In the 70’s the market for premium South American beans collapsed when major US food conglomerates like Kraft decided that ,in the midst of a recession, US consumers would drink whatever was poured. It would be easy to see companies supplying Chinese consumers –who are notoriously thrifty, come to the same conclusion if Vietnamese Robusta becomes compellingly inexpensive compared to South American Arabica.

We remain long Coffee via JO, the exchange traded fund.

Andrew Barber

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11/03/08 01:21 PM EST

Coffee (JO) Update: Seasonality Remains Bullish...

We have been following Coffee closely in recent weeks as interesting supply data emerged from South America and South East Asia. The latest bullish data point to emerge is unseasonable rain in the central highlands of Vietnam which may delay and diminish yields for the current Robusta cycle there.

In earlier posts we discussed Vietnam’s recent emergence as a major global producer of Coffee, particularly the less valued Robusta variety. With heavy rainfall in the Dak Lak, Dak Nong and Lam Dong regions and more anticipated by meteorologists, contracts for both Arabica and Robusta contracts spiked sharply late in the week.

The short term bullish thesis that we have been exploring for coffee in General and Arabica is based on the assumption that consumers in China and other developing economies that have acquired a taste for premium blends, will continue to be loyal consumers for the immediate future despite signs of slowing economic growth. In short, demand resilience combined with tightening supply in both the primary and substitute markets will drive the price higher in the near term.

The seasonal inflections of the futures markets also support the bullish case here. We averaged returns for Arabica contracts from 1973 to the present. On a 35,30,20,15, 10 and 5 year average basis the near month contract has risen in November as part of a seasonal pattern that straddles the end of harvest in Brazil and the return of cold weather in the US and Europe –which traditionally increases the consumption of hot beverages (see chart below).

The long term bullish case is less clear. In the 70’s the market for premium South American beans collapsed when major US food conglomerates like Kraft decided that ,in the midst of a recession, US consumers would drink whatever was poured. It would be easy to see companies supplying Chinese consumers –who are notoriously thrifty, come to the same conclusion if Vietnamese Robusta becomes compellingly inexpensive compared to South American Arabica.

Andrew BarberDirector

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Gold, Equities, and the US Dollar...

Last week, Gold (GLD) and US denominated cash (UUP) underperformed US equities meaningfully. At the margin, this augured profitably for us, as we spent the better part of the back half of October deploying our 96% Cash position into global equities.

When "Heli-Ben" drops cash from the heavens, and interest rates fall to sub zero (on a real basis), the last thing that is going to earn you a return is cash. This chart shows last week’s relative performance of these 3 asset classes. Math and Macro don't lie. People do.KM

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11/03/08 12:05 PM EST

FINL: CFO Departure Does Not Alarm Me

I always cringe when a story I like has a CFO change. While Dollar Tree is no prize, Kevin Wampler leaving The Finish Line to be CFO of DLTR is a step-up for him. This was not a departure because fortunes have changed and FINL needs a fall guy, but rather an offensive move by Wampler to be the top finance guy at a company 7x the size of FINL (even though comp scales appear to be fairly similar between companies -- as outlined below). I can never say it is a ‘non event’ when leadership changes, but I’m looking for things to be rather smooth here – especially with zero debt, no covenant and credit exposure, a healthy lease portfolio, and an improving product cycle.

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11/03/08 12:01 PM EST

‘The Question’

The purpose of “The Question” is to get to the bottom of key issues of investment significance, and to call out those companies that are particular standouts (+ and -).

With Obama looking increasingly likely to take the election, he has been very outspoken about passing the Employee Free Choice Act, which would eliminate the secret ballot making it much easier to unionize. This in turn would result in higher wages and benefits.

Food and labor costs represent 60-70% of the cost of running a restaurant. I have no idea where Obama stands on food costs or if any of his policies will cause an increase in the cost of food. Labor costs represent 30%+/- of that total. Over the past three years, the industry has faced significant labor inflation and thus lower margins. Unfortunately, there is not much the industry can do. In this environment you can’t raise prices and you can’t cut labor or you will lose customers. The restaurant industry is one of the largest employers in the United States. Given the current environment, if Obama’s policies accelerate labor inflation, it will only cause more companies to go bankrupt and increase unemployment. How does anybody prepare for that scenario?

This is the question I threw out to some key executives within the restaurant industry. I have included a couple of the more interesting responses:

-The key will be whether or not the Republicans can hold 40 seats in the Senate. 40 seats will allow them to filibuster any bill proposed by the Democrats including the Employee Free Choice Act which if passed, will neither be free nor a choice (Please sign this card Mr. Penney…and we know where you live!). If the Republicans can’t hold a 40 seat minority, the first target will be Wal-Mart followed by Target, Home Depot, Lowe’s etc. Restaurants will be further down the list starting with McDonald’s and Burger King. Eventually, they will get to casual dining. However, it may be a tougher sell for restaurants with a primarily young and transitory workforce. Just like healthcare (which we offer from day one and most of our employees decline), I suspect restaurant industry workers see their jobs as less of a career and more of a stepping stone to bigger and better opportunities and thus may not find value in unionizing.

-Although I believe it would be tough to unionize pizza delivery drivers, we have actually seen sporadic attempts to do so. We believe the Employee Free Choice Act would make it easier to do so, and we strongly oppose it. With a democratic presidency and congress, we are sure to pass it.

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